IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

Zepp Health Corporation / Equity Capital Markets

Hot on the heels of the upcoming blockbuster <a href="https://www.smartkarma.com/entities/24409" target="_blank" data-smartkarma-citation="entities:24409:1">Xiaomi Corp (XIAOMZ CH)</a> IPO, Huami filed for an IPO in the US to raise $150 million on 12 January. It is a wearable device company backed by its largest customer Xiaomi, a 20.4% shareholder.Overall, we are cautious on Huami's IPO. We believe Huami’s operating profit is a mirage and reflects a company which for all practical purposes is Xiaomi’s subsidiary masquerading as an independently run company. If Huami were an independently run company designing, manufacturing, marketing and distributing its products, it would be unprofitable. Our cautious view is based on:<ol><li>Two market trends can potentially impact Huami’s prospects. Firstly, the pace of fragmentation in the global wearable market is escalating. Secondly, 73% of Huami's revenue arise from smart bands, which is one of the slowest growing segments of the global wearable market. </li><li>Huami’s gross margins will likely remain materially below its peers due to two factors. Firstly, Huami receives a “manufacturer markup” for Xiaomi wearable products which places a ceiling on Xiaomi wearable products gross margin. Secondly, for similar ASPs, Huami’s self-branded products gross margin is lower than peers and reflects Huami’s strategy of buying market share by underpricing its products relative to its features. </li><li>Huami’s S&amp;M as a percentage of revenue is 2% in 2016, considerably below <a href="https://www.smartkarma.com/entities/746" target="_blank" data-smartkarma-citation="entities:746:1">Fitbit Inc A (FIT US)</a> (23%) and <a href="https://www.smartkarma.com/entities/17179" target="_blank" data-smartkarma-citation="entities:17179:1">Garmin Ltd (GRMN US)</a> Fitness (11%). Huami’s S&amp;M spend is low as it does not incur costs for marketing or distributing Xiaomi wearable products. However, an ambition of selling its self-branded products globally will require a ramp up in S&amp;M spend. If Huami’s S&amp;M as a percentage of revenue is in line with the peer average, its operating margin would be -8% in the first nine months of 2017.</li><li>Like peers, Huami outsources manufacturing to contract manufacturers. Contract manufacturers require the customer to pay for all tooling required to manufacture the customer’s products. Consequently, CapEx is a significant expense and was 5.6% of Fitbit and 3.9% of Garmin’s revenue. In stark contrast, Huami’s CapEx is 0.2% of revenue as Xiaomi pays for the majority of Huami's tooling expenses. Crucially, Huami’s low CapEx implies a corresponding low depreciation charge, overstating profits relative to peers.</li></ol>We will provide a view of valuation once the IPO price range is announced. It is also worth reading fellow insight provider Ye Kan's note - <a href="https://www.smartkarma.com/insights/huami-technology-ipo-first-take-a-maturing-hardware-company" target="_blank" data-smartkarma-citation="insights:16836">Huami Technology IPO First-Take: A Maturing Hardware Company</a>.

Hot on the heels of the upcoming blockbuster Xiaomi Corp (XIAOMZ CH) IPO, Huami filed for an IPO in the US to raise $150 million on 12 January. It is a wearable device company backed by its largest customer Xiaomi, a 20.4% shareholder.Overall, we are cautious on Huami's IPO. We believe Huami’s operating profit is a mirage and reflects a company which for all practical purposes is Xiaomi’s subsidiary masquerading as an independently run company. If Huami were an independently run company designing, manufacturing, marketing and distributing its products, it would be unprofitable. Our cautious view is based on:Two market trends can potentially impact Huami’s prospects. Firstly, the pace of fragmentation in the global wearable market is escalating. Secondly, 73% of Huami's revenue arise from smart bands, which is one of the slowest growing segments of the global wearable market. Huami’s gross margins will likely remain materially below its peers due to two factors. Firstly, Huami receives a “manufacturer markup” for Xiaomi wearable products which places a ceiling on Xiaomi wearable products gross margin. Secondly, for similar ASPs, Huami’s self-branded products gross margin is lower than peers and reflects Huami’s strategy of buying market share by underpricing its products relative to its features. Huami’s S&amp;M as a percentage of revenue is 2% in 2016, considerably below Fitbit Inc A (FIT US) (23%) and Garmin Ltd (GRMN US) Fitness (11%). Huami’s S&amp;M spend is low as it does not incur costs for marketing or distributing Xiaomi wearable products. However, an ambition of selling its self-branded products globally will require a ramp up in S&amp;M spend. If Huami’s S&amp;M as a percentage of revenue is in line with the peer average, its operating margin would be -8% in the first nine months of 2017.Like peers, Huami outsources manufacturing to contract manufacturers. Contract manufacturers require the customer to pay for all tooling required to manufacture the customer’s products. Consequently, CapEx is a significant expense and was 5.6% of Fitbit and 3.9% of Garmin’s revenue. In stark contrast, Huami’s CapEx is 0.2% of revenue as Xiaomi pays for the majority of Huami's tooling expenses. Crucially, Huami’s low CapEx implies a corresponding low depreciation charge, overstating profits relative to peers.We will provide a view of valuation once the IPO price range is announced. It is also worth reading fellow insight provider Ye Kan's note - Huami Technology IPO First-Take: A Maturing Hardware Company.

Huami IPO Preview: An Unprofitable Company Masquerading as a Profitable One

Asia Pac IPO & Placement Research, China biotech, Aequitas Research

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

Huami Technology, a China-based leading wearable product player, filed (link to Form F-1 <a href="https://www.sec.gov/Archives/edgar/data/1720446/000119312518009841/d410987df1.htm" target="_blank">here</a>) to list in the U.S. In this insight, we will look into the company's business fundamentals and compare the stock to its listed peers. Our analysis points to slow down of sales growth in certain segments as we are concerned by the competition commoditizing smart wearables. We also highlight limitations for a member company like Huami in the Xiaomi ecosystem despite the perceived strong backing. We will…

Huami Technology, a China-based leading wearable product player, filed (link to Form F-1 here) to list in the U.S. In this insight, we will look into the company's business fundamentals and compare the stock to its listed peers. Our analysis points to slow down of sales growth in certain segments as we are concerned by the competition commoditizing smart wearables. We also highlight limitations for a member company like Huami in the Xiaomi ecosystem despite the perceived strong backing. We will…

Huami Technology IPO First-Take: A Maturing Hardware Company

United States

Zepp Health Corporation operates as a wearable technology devices. The Company offers touch screen, stainless steel, waterproof, and color options wearable devices. Zepp Health serves customers worldwide.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Zepp Health Corporation (ZEPP US)

Huami IPO Preview: An Unprofitable Company Masquerading as a Profitable One

Hot on the heels of the upcoming blockbuster Xiaomi Corp (XIAOMZ CH) IPO, Huami filed for an IPO in the US to raise $150 million on 12 January. It...

Arun George

Huami Technology IPO First-Take: A Maturing Hardware Company

Huami Technology, a China-based leading wearable product player, filed (link to Form F-1 here) to list in the U.S. In this insight, we will look...

Ke Yan, CFA, FRM

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)